China's Structural Problems​

By Jake Rickman​

What do you need to know this week?

There are signs the international investment community is baulking at China’s long-term prospects.

International equity investors have shed $6bn in mainland Chinese shares in the first three months of 2022. While the Chinese government’s decision to reimpose aggressive lockdowns in several provinces is a large factor in this week’s tumble, some analysts are looking at longer-term indicators.

For starters, the country’s property sector is facing widespread distress. For years, Chinese property developers operated on credit: taking up-front payments from homebuyers to fund downstream developments. Anxious about the ever-growing credit bubble, the Chinese government stepped in and imposed leverage restrictions (limits on the ratio of debt to cash) on developers like China Evergrande. Developers then found it difficult to access cash to finish their developments. Cue the crisis.

Now, residential sales are down. The immediate outcome depends on the government’s response: will they pivot on their policy while also protecting the rights of “offshore” (i.e., non-mainland) creditors? If not, international investors may retreat from their exposure to China’s property sector.

More broadly, there may be economic parallels between China today and Japan in the 1990s. Decades of population growth is now slowing, which means that in a generation, there may be flat to negative population growth. Additionally, rising national debt may precipitate a situation where, despite liberal monetary policy (the government pumping money into the economy), creditors remain reluctant to invest (because of slowing organic growth).

Why is this important for your interviews?

A common interview question at many City law firms is “Where should we open up our next office?”.

Associates and partners like this question because a good answer requires a double-dose of commercial awareness.

First, your answer demonstrates how engaged you are with what is going on in the world now and how that might play out in the future. For instance, what are the implications of an ageing population in China for investors in the future? Which sectors stand to be impacted the most?

Second, a good answer requires you to consider the key drivers of a law firm as a business in its own right. How might foreign investors’ retreat from China directly influence the firm you are interviewing with in the future? What does the timeline look like? What other regions might be more attractive in the next ten to fifteen years?

How is this topic relevant to law firms?

Ultimately, law firms go to where they think their clients (or prospective clients) will be. For two decades, China has been the beacon of emerging market opportunities; there are now some signs that this might change.

While firms like Kirkland & Ellis and Dechert — known for their Chinese presence — are unlikely to immediately retreat from China, they are looking at where to go next.

For instance, India now boasts nearly 9% GDP growth a year (compared to China’s projection of 5.5% for 2022). How could a law firm leverage this?


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